U.S. economy shrank more than previously thought in early 2025

Yahoo

3 days ago

The U.S. economy shrank faster than previously thought during the first three months of 2025, with growth contracting for the first time in three years.
The country's gross domestic product fell at an annual rate of 0.5% from January through March, the Commerce Department reported Thursday in its third and final GDP report for the period. The agency's initial first-quarter GDP report, issued in April, estimated a 0.3% decline, which was later revised to a 0.2% dip in its second print.
First-quarter growth was weighed down by a surge of imports as U.S. companies and households rushed to buy foreign goods before the Trump administration's tariffs went into effect. Although a surge in imports can appear to lower economic growth because it shows a shift away from domestic consumption, that doesn't tell the whole story about the U.S. economy, experts say.
A category within the GDP data called "real final sales to private domestic purchasers," which measures the economy's underlying strength, rose at a 1.9% annual rate from January through March. While that represents a solid number, it's down from the 2.9% pace in the fourth quarter of 2024 and from the Commerce Department's previous estimate of 2.5% January-March growth.
The new data also shows that consumers sharply pared spending earlier this year, with growth at 0.5%, down from a robust 4% during the last three months of 2024. First-quarter consumer spending fell to its lowest level since the pandemic ended, with Americans particularly cutting back on recreation and dining, Greg Daco, EY-Parthenon chief economist, said in a research note.
"What we're witnessing is an economy temporarily buffered from the tariff shock by smart logistics maneuvers, proactive pricing strategies and some foreign exporter concessions," Daco said.
On Tuesday, Federal Reserve Chair Jerome Powell told a House committee that businesses' rush to build their inventories earlier this year ahead of tariffs taking effect has helped delay any inflationary impacts from the import duties.
Because tariffs are paid by domestic importers, all or some of the costs are typically passed onto consumers. Stocking up on inventory early in the year has allowed companies to sell those goods without the added costs of tariffs, Powell noted.
"The things that are being sold at retail now, they might have been put into inventory before the tariffs in February or March," the Fed chief said. "We think we should start to see this over the summer, in the June numbers and in the July numbers."
Second-quarter rebound?
The category of real final sales to private domestic purchasers includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending. Ryan Sweet of Oxford Economics called the decline in that figure "troubling,″ though he doesn't expect to make a significant change to his near-term economic forecast.
Sweet noted that he'll be looking Friday's release of personal consumption expenditures, or PCE, because it will "show how the revisions impacted the trajectory of consumption headed into this quarter."
The PCE, the Federal Reserve's preferred inflation measure, shows household spending on goods and services.
Economists are forecasting that the first-quarter's influx in imports won't be repeated in the second quarter, which spans April through June, and shouldn't weigh on GDP during the period.
Economic growth is forecast to bounce back to 3% in the second quarter, according to economists polled by financial data firm FactSet. The Commerce Department will release its first estimate of second-quarter GDP on July 30.
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